TMI Blog2020 (1) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... ch clarifies that even if any research and development in any field is done in process of providing notified services, in particular, services of engineering and design, the same will be covered under aforesaid CBDT notification which will be eligible for 10A/10B benefit. Although assessee conducts research and development activities, but the same is only a process step to provide final output to its parent company. Also observed that what is developed by assessee under this segment is a customised electronic data created through various research and development. No doubt, invoices placed in paper book mentions Research and Development charges cannot impliedly mean that activities carried on by assessee under Bio-informatics segment does not amount manufacture computer software. A co-joint reading of definition of computer software and the CBDT Circular No.1/2013 what comes to our understanding is that assessee is developing a customised software in the form of bio-infirmatics tools using platforms like C++, Java which is used to analyse gene sequence, protein sequence in Silicon Valley owning, gene expression profiling, pathways development etc, This is what AO intend from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bengaluru (`CIT') is bad in law and / or void ab initio and is liable to be quashed. 2. That on the facts and circumstances of the case. the learned CIT has erred in holding that the assessment order dated October 31, 2013 passed under section 143(3) read with section 147 of the Act by the Assessing Officer (`A0'), is erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Act. The learned CIT has erred in not appreciating the fact that the conditions as prescribed in section 263 of the Act with respect to the revision of orders which are prejudicial to the interest of the revenue (such as the Assessing Officer had conducted inadequate enquiry or there was a lack of enquiry), has not been satisfied in the instant case The learned CIT has erred in not following the below mentioned judicial pronouncements- Commissioner of Income-tax vs. Sunbeam Auto Ltd. [(2011) 332 ITR 167 (Delhi High Court)] Vegesina Kamala vs. Income-tax Officer [(2016) 157 ITD 457 (Visakhapatnam - Trib.)] 5. The learned CIT has erred in not appreciating the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are development would be covered within the ambit of the definition of the term Computer Software and accordingly, would be eligible for deduction under section 10B of the Act. 12. The learned CIT has failed to appreciate the fact that the result of the research and development carried out by the Appellant which is exported outside India is nothing but the software (i.e. Vector NTI advance) which is developed by the Appellant in India. 13 The learned CIT has failed to appreciate the documents (such as financial statements evidencing the fact that the earnings of the Appellant in relation to the sale proceeds from the export of the software during the year under consideration are in foreign currency, Foreign Inward Remittance Certificate (TIRO') evidencing the fact that the software developed by the Bioinformatics division of the Appellant during the year under consideration is exported outside India, R D Agreement) submitted by the Appellant in support of its claim that the software developed in India is actually exported outside India. 14. The learned CIT has failed to appreciate the fact that the deduction under section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to setting up of 100% Export Oriented Unit (EOU') for manufacture and export of functional genomics and bioinformatics chemistry. The learned CIT has failed to appreciate that the relevant documents (i.e. approval letter dated March 10, 2005 CSEZ and approval for license for private bonded warehouse dated April 12, 2005 issued by the office of the Deputy Commissioner of Customs) was submitted by the Appellant vide submission dated March 29, 2016. The learned CIT has erred in not following the decision of the Hon'ble Delhi High Court in case of CIT vs. Enable Exports [(2012) 17 taxmann.com 182 (Delhi High Court), wherein it was held that, approval granted by the Development Commissioner of EoU is valid for claiming deduction under section 10B of the Act. 9. The learned CIT has failed to appreciate the fact that the Appellant is engaged in research and development activities relating to software development. The said fact is established by Exhibit A to the Research and Development Services Agreement dated January 01, 2005 read with Addendum effective from April 01, 2008 entered into between Invitrogen Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. Brief facts of the case are as under: Assessee is 100% EOU registered with Cochin Special Economic Zone for manufacture and export of functional genomics and Bio Informatics Chemistry. Assessee for years under consideration filed return of income book for assessment year 2007-08 and 2008-09 on 30/09/08 declaring total income at NIL and loss of ₹ 80,48,771/-, respectively. Ld.AO observed that assessee claimed deduction under section10B amounting to ₹ 92,56,242/- and ₹ 1,97,61,465/- respectively for years under consideration. Return was processed under section 143(1) of the Act, and orders under section 143(3) was passed, accepting NIL income for assessment year 2007-08, vide order dated 22/12/09 and for assessment year 2008-09, total income was assessed at ₹ 4,02,970/-. 2.1 Subsequently, while assessment for assessment year 2009-10 was going on, Ld.AO had sufficient reason to believe that, assessee wrongly claimed de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng R D facility in the field of molecular biology i.e. functional genomics and bioinformatics on behalf of its associate (holding) company and cost is being reimbursed by the associated company with 10% commission. Hence, there is no activity of manufacturing and export of any article or thing or computer software as claimed by the assessee company. Thus, the assessee company is engaged basically in the activity of scientific research and development work which is not relating to computer software and hence it not a part of any notified ITES. Hence, the assessee company has claimed excessive relief/deduction under the I.T.Act by way of exemption U/s10B for ₹ 92,56,242/-. Further, in the in the course of original assessment proceedings, the assessee company did not disclosed nature of business activity of the company fully and truly. It was only disclosed that the assessee company is engaged in the business of research and development in the field of bioinformatics and functional genomics and there was no information to show that as to how the business activity of the company amount to manufacturing and export of computer software or product or service in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Scrutiny assessment order U/s 143(3) r.w.s. 147 in your case, was passed on 31.10.2013 for the AY 2007-08. 2. On perusal of records, it is noticed that in the assessment order passed u/s.143 r.w.s. 147 for the asst.year 2007-08 , the deduction u/s 10B has been incorrectly alllowed as the activities of the Bioinformatics division do not come within the meaning of the term ' export of computer software'. The deduction is allowed based on the fact that software expenses are employed in the said division. This has resulted in incorrect allowance of deduction u/s 10B to the extent of ₹ 34,03,693/- . 3. Hence, the order passed by the AO, is erroneous prejudicial to the interest of revenue. I, therefore propose to pass an appropriate order u/s 263 of the LT Act, 1961, for the assessment year 2007-08. 5. In this connection, you are requested to file your clarifications on the objections, if any, to the proposed action on or before 05.01.2016. You are also given an opportunity of personal hearing before the undersigned at his office at BMTC Building,5th Floor, 80 Feet Road, Koromangala, Bengaluru -95 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment and software customization by using platforms like C++, Java etc. It was submitted that the software developed is carried on by assessee are either for its own products or independent projects, and that the independent projects relate to development of software, tools or application for external customers. It has been submitted that these projects are contractor by the parent company directly with external agencies and are billed directly to them. Assessee invoices its parent company and receives compensation for the projects on cost plus markup basis. 4.2 Ld.AR submitted that assessee in its own product category undertakes end to end development of software products, tools and application. It has been submitted that the major product released in its own products, segment includes Vector NTI which is a stand-alone text of software which allows both academicians as well as professionals to carry out detailed research in the field of genomics. It has been submitted that this software is equipped with comprehensive seaward of tools which allow mapping and analysing DNA and protein sequence, aligning different DNA and protein sequence to compare th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there has been no mistake on behalf of Ld.AO in allowing the claim of 10B deduction for bio-informatics division. He submitted that Ld.AO had called for all the necessary details and upon verifying same and allowed claim of assessee. Accordingly, he submitted that the view taken by AO in these two years on the impugned issue is one of the possible view. Accordingly, he submitted that the assessment orders cannot be termed as erroneous an prejudicial to the interest of revenue. Ld.AR submitted that the observations of Ld.CIT is based upon the invoices placed at page 89-98 of paper book for assessment year 2007-08, wherein the description has been mentioned to be research and development charges. In support of his contention that reassessment order passed by Ld. AO is neither prejudicial nor erroneous to the interest of the revenue, Ld.AR placed reliance upon following decisions: Malabar industrial Co Ltd vs CIT reported in (2000) 109 Taxmann 66 (SC); CIT vs Gabriel India Ltd (1993) 203 ITR 108 (Bom); CIT vs Sunbeam Auto Ltd (2010) 189 Taxmann 436 (Del); CIT vs Gokuldas Exports (2012) 20 taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 10 B to Bioinformatics segment, is not only erroneous but also prejudicial to the interests of revenue. 6. We have perused submissions advanced by both sides in light of records laced before us. 6.1 From reasons recorded for re-opening of assessment, it is observed that assessments were re-opened in order to verify deduction claimed by assessee u/s 10B of the IT Act, in respect of both genomics and bio-informatics divisions. Ld.CIT, has observed that while passing original assessment order in respect of both years under consideration, Ld.AO failed to verify the factual background and functions carried by assessee under both divisions. Ld. AO in notice/questionnaire issued called for various details calling upon assessee to establish the correctness of deduction claimed u/s10B of the Act. Assessee has been called upon by Ld.AO to explain whether assessee satisfies necessary conditions u/s 10B of the Act. 6.2 It is thus, observed that Ld.AO during reassessment proceedings has called for various details to analyse, whether assessee is eligible for deduction under section 10B of the Act, for both segments, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of results of the research and development carried out by it. Thus, there is no denial on behalf of Ld.CIT that assessee is not involved in development of software tools. However, according to Ld.CIT, exemption should be denied because assessee is exporting results of research and development carried out by Bioinformatics division. 7. At this juncture, we deem it necessary to extract observations of DRP for assessment year 2010-11, wherein reference to Circular 1 of 2013 issued by CBDT has been made, which clarifies that even if any research and development in any field is done in process of providing notified services, in particular, services of engineering and design, the same will be covered under aforesaid CBDT notification which will be eligible for 10A/10B benefit. 7.1 We notice that, although assessee conducts research and development activities, but the same is only a process step to provide final output to its parent company. It is also observed that what is developed by assessee under this segment is a customised electronic data created through various research and development. No doubt, invoices placed in paper book mentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Malabar Industrial Co Ltd (supra) observed as under: section 263 of the income tax act, 1961 empowers the Commissioner to call for and examined the record of any proceedings under the act and, if he considers that any order passed therein, by the assessing officer is erroneous insofar as it is prejudicial to the interest of the revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The keywords that are used by section 263 are that the order must be considered by the Commissioner to be erroneous insofar as it is prejudicial to the interest of the revenue . The provision has been interpreted by the Supreme Court in several judgements to which it is now necessary to turn. In Malabar industrial Co Ltd vs CIT (2000) 243 ITR 83, the Supreme Court held that the provisions cannot be invoked to correct each and every type of mistake or error committed by the assessing officer and it is only when an order is erroneous that the section will be attracted . The Supreme Court held that an incorrect assumption of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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